From PRINT EDITION MicroCap Review Winter/Spring 2016

Tuesday, February 02, 2016

Loud music booms down the hallway outside the Singing Machine Company’s Fort Lauderdale headquarters. Inside, the Company is testing out the latest Singing Machine “Carnaval” their latest product in a new line of Digital Download karaoke machines. It is quickly apparent that the new “Carnaval” is fully loaded to achieve maximum fun. It’s loaded with the latest tech and filled with all the features to make it a roadshow warrior -- big, loud speakers, a lithium-ion battery and travel wheels and trolley handle for portability. And to really emphasize fun, the company built in disco ball lights. Lots and lots of room-filling, dazzling lights that bathe any room in color. All of this is designed to emphasize the idea that this company and its products are all about fun.

The Singing Machine Company has been creating joy through music for over 32 years and has been publicly traded since 1994. The Company now trades on the OTCQB under the ticker “SMDM”. Over the last four years, the Company has been on a growth tear, posting 5 consecutive years of profits and double-digit growth in sales. This year is no exception as the Company recently released its 2nd quarter ended September 30, 2015 results, boasting a 31% increase in sales compared to the prior year and quarterly net income of almost $2 million dollars, or $0.03 cents per share. The Company is currently trading at a P/E ratio of 6 for the second quarter ended earnings results.

Singing Machine sells their karaoke machines through all major big box retailers in North America like Wal-Mart, Target, Toys ‘R’ Us, Costco, and Sam’s Club and Amazon.com. The Company also sells internationally to countries like Australia, South Africa, and the United Kingdom. The Company reports its products can be found in over 25,000 retail stores world-wide and last year announced it had sold over 1,000,000 karaoke machines in its 2015 fiscal year.

Gary Atkinson, Company CEO, laughs as one of his staffers belts out a poorly done out of tune version of Adele. “It doesn’t matter how well you sing as long as you can have fun with friends,” commented Gary Atkinson. Mr. Atkinson, a former licensed attorney and MBA graduate, who has shifted gears significantly to lead the Singing Machine’s transition over the last 7 years.

The Company’s North American strategy has been to push out competitors but occupying all of the retail shelf space allocated for karaoke products. The Company produces over 30 models of karaoke machines ranging in price points from $49 up to $299 and has the range of features and price points to lock up most of the big box retailers in North America. The strategy has worked as the Company has seen its sales surge over the last 5 years from approximately $19.0M to almost $40.0M in its most recent fiscal-year ended results.

Now as the market share leader, the Company is setting its sights on transforming itself from a primarily hardware based Company to a hardware and music distribution company. This year Singing Machine released a new line of Digital Download karaoke products with the goal to enter into the karaoke music distribution business. Previously, the main way to access music on any home karaoke machine was to buy a karaoke CD+G, which is essentially a special music CD that has graphical lyric files on it. Outside music content companies dominated the sales of karaoke CDs as Singing Machine did not have the licensing relationships to sell its own karaoke content. Going forward, the Company is betting that consumers are willing to ditch their antiquated CDs in favor of picking and choosing their favorite songs from the Company’s library of digital karaoke content.

Atkinson comments, “It’s the old razor and razor-blade business model that we think will transform this Company. Singing Machine is already the most trusted brand in home karaoke and we currently do not take full advantage of our position as the market leader status. We believe over time we can convert all of our machines into a recurring revenue stream where our machines can provide the gateway to karaoke music downloads or subscriptions.”

Atkinson added, “We now have 10% of our machines able to play digital downloads from our online music store. In addition, 40% of our lineup is able to stream karaoke content via Bluetooth using our Mobile Karaoke App, available on the iOS App Store.” The Company charges $2.00 per digital download or offers subscription packages to stream any song from its online library for either 48-hours, 1 month, or 1 year.

A Singing Machine staffer nails a tough Whitney Houston song and the room erupts with applause. As the Company moves into the holiday season, which has always traditionally been its strongest quarter, it hopes there will be a lot more to applause in its future. Third quarter results are expected to be announced by February 15, 2016.